EU trade commissioner Sefcovic is in discussions with Lutnick and Greer to set up a framework agreement. Their aim is to list as many products as possible that would be exempt from tariffs. However, not all tariff issues have been settled, and some difficulties are expected during the talks. The framework agreement is a temporary arrangement that was established before August 1. It allows for further negotiations to fine-tune the positions of both sides. This situation draws comparisons to the existing trade arrangement between the US and China. The long-term effects for the EU in securing favorable terms with the US are still unclear.

Rising Volatility in Trade Talks

Recent remarks about possible “turbulence” in trade discussions indicate increasing volatility. This suggests that the market calm, which followed the initial framework agreement before August 1, may not last. We see this as a chance to explore strategies that can benefit from larger price fluctuations in the upcoming weeks. It’s worth considering buying protection for European stocks, especially in sectors sensitive to tariffs, like German car manufacturers. The Euro Stoxx 50 Volatility Index (VSTOXX), a key measure of market anxiety, is currently around 18, a low not seen since spring. During the trade disputes of 2024, this index rose above 25 in similar situations, making volatility options look inexpensive right now. The ongoing uncertainty is likely to put pressure on the euro while strengthening the US dollar as a safe option. The EUR/USD exchange rate, which has been stable around 1.08 for the past month, might face significant challenges. We expect a potential test of the year’s low near 1.06 if negotiations worsen or if negative headlines emerge.

Trade Talks and Market Implications

Creating a zero-tariff “exemption list” will clearly benefit some European industrial and agricultural companies while hurting others. This creates a perfect opportunity for strategies such as straddles or strangles on companies whose tariff outcomes are unclear. These positions could profit from significant price movements in either direction once a company’s status is determined in the discussions. Create your live VT Markets account and start trading now.

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